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CFPB Final Rules on Forced Arbitration Fuels Debate


If you want to start a heated debate, bring up forced arbitration.

The Consumer Financial Protection Bureau just finalized a rule that bans banks and financial companies from inserting certain “forced arbitration” clauses in deposit account, credit card, auto loan, student loan, payday loan, and other financial contracts. Consumer advocates are cheering, and those in the financial industry are none too happy. Both sides anxiously wait the outcome of Congressional review. In 2007, Congress banned arbitration in certain loans to servicemembers and veterans, and in 2010 it banned arbitration in most mortgages.

Meanwhile, there’s a lot of reaction to the CFPB’s ban. Len Bernstein, a partner at Reed Smith LLP and chair of the firm’s Financial Services Regulatory Group, explains the significance. “If the rule survives Congressional review and repeal efforts, as well as any lawsuits lodged by industry, it will be easier for consumers to file a class action complaint against financial services companies and, perhaps, achieve a settlement.  The law also mandates that certain arbitration information be made public.  Consumers will likely gain more awareness of the benefits and risks of pursuing arbitration versus suing on a class action basis to resolve their grievance.”

The relief that consumers obtain in arbitration pales next to the billions in relief provided to tens of millions of consumers in class actions.

-Lauren Saunders, Associate Director of the National Consumer Law Center

What’s at stake for financial institutions? “They would probably need to devote more resources to the defense of class action complaints, which is expensive notwithstanding the merits.  They will also be required to devote additional resources in order to provide certain reporting on arbitrations to the CFPB as required under the rule,” says Bernstein.

But consumer advocates see progress, “Once the rule goes into effect next year, consumers who are harmed by widespread violations of the law like Wells Fargo's fake account scandal, will get their day in court and be able to band together in a class action that can force the wrongdoer to repay all of its victims. A CFPB study found class action lawsuits returned $2.2 billion to 34 million consumers after attorneys’ fees and court costs.  But as more and more companies add forced arbitration clauses with class action bans, without the CFPB it would be easier for companies to harm millions of people and get away with it,” says Lauren Saunders, associate director of the National Consumer Law Center.

She points out that forced arbitration clauses mostly keep people from getting any relief, as few have the time or resources to fight individual cases. “The relief that consumers obtain in arbitration pales next to the billions in relief provided to tens of millions of consumers in class actions. In the CFPB study, consumers obtained relief in only 76 cases totaling $400,000.”

But the banking industry has a different opinion. In a prepared statement, the American Bankers Association’s CEO and President Rob Nichols said, “We’re disappointed that the CFPB has chosen to put class action lawyers – rather than consumers – first with today’s final rule.  Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration.  The Bureau’s own study found that arbitration has significant benefits over litigation in general and class actions in particular.  Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation, which helps keep costs down for all consumers.”

Consumers also fare better in arbitration [...] Consumers receive nothing at all in nearly nine out of 10 class action lawsuits.

-Rob Nichols, American Bankers Association’s CEO and President

Furthermore, “Consumers also fare better in arbitration – the Bureau’s study found that consumers receive $5,389 on average compared to $32.35 in litigation.  Consumers receive nothing at all in nearly nine out of 10 class action lawsuits. Despite acknowledging these benefits in its own study, the Bureau has chosen to write a rule that would essentially eliminate arbitration – and force consumers into court – by requiring companies to face a flood of attorney-driven class action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose. As Congress considers changes to the CFPB’s structure and accountability, we also urge lawmakers to overturn this rulemaking.”

Viveca Ware, group executive vice president, regulatory policy for the Independent Community Bankers of America, voiced her concerns, “The arbitration process was working well for consumers and financial institutions. When the rules go into effect, it will cost consumers and financial institutions. With arbitration, financial institutions bore the cost.”

Ware says that the final rule requires financial institutions provide certain customer information to the CFPB, like name and personally identifiable information. “It will be easier to identify individuals in the smaller markets that we serve,” says Ware who says this could open the door to misuse of people’s information.

The bottom line – this is far from the last word on forced arbitration. Linda Sherry, director of national priorities for Consumer Action says, “Of course we’ll be bracing for a fight to protect the rule from Congress. Already one member has started a CRA process to kill the ban.”

Bozo   |     |   Comment #1
As one who has been "around the block" in arbitration (as an attorney, not a principal), it's a consumer minefield. As a practical matter, unless one has "damages" well into the low six digits ($100,000+), it's well-nigh impossible to find an attorney who will take the case on a contingency.

Then, there's the mechanism of arbitration itself. The client (the consumer) must front the fees for the arbitration, unless the lawyer is willing to do so (good luck on that). The fees can easily reach into several thousand dollars. A panel of three arbitrators, obviously, is three times more expensive than a panel of one arbitrator. Which would you prefer?

Moving right along, the decision of the arbitrator(s) is final. No ifs, ands, or buts. Aside from fraud, there is really no appeal from the decision.

Class actions are an entirely different subject. Most consumer grievances do not fit into the class action playbook. Stated another way, just because the complaint is styled as a "class action" does not mean the matter will be certified.
Bozo   |     |   Comment #2
Now, let's explore the makeup of panels. Panels are the euphemistic description of the lists of arbitrators. You don't just walk down the street and tap somebody on the shoulder to become an arbitrator. Juries in civil cases are drawn from the community at large. Not so with arbitration panels.

Panel members must apply. It's not exactly on the radar for most folks as a gig. As a result, panel members tend to be aligned with commercial interests, whether as lawyer or principal. While peremptory challenges to prospective panel members are available, panels (in my experience) resembled the local Chamber of Commerce, if you get my drift.

Moreover, the axiom of your credit union (once a member, always a member) most assuredly does not apply to arbitration panels. One is a member of a panel only so long as one is in favor with the sponsoring organization (e.g., AAA, JAMS, etc.). The sponsoring organization depends for its survival on referrals (contractual or otherwise) from commercial entities*. Get the drift?

*For many years, the American Association of Architects provided, in its form contracts, binding arbitration with the American Arbitration Association.
Bozo   |     |   Comment #3
So, what to do? In your garden-variety contract of adhesion (that contract with the phone company, or your brokerage), the answer is "not much". Unless or until mandatory binding arbitration clauses are tossed "as a matter of public policy", the contract is the contract. The irony is that all the competition has adopted binding, contractual arbitration. Whether recent rulings allowing class actions make a difference is problematic.
Martin   |     |   Comment #9
I'm looking the arbitrations from the bank's viewpoint. Imagine small discrepancies in the amounts or interest rates trigger a lawsuit for thousands of dollars to collect the $0.50 discrepancy. As an ex-attorney yourself, you would be tempted to collect the punitive damages and court costs from the bank and give your client the $0.50 discrepancy and I bet you will get the case to enrich yourself.
We are not talking about fraud or human errors that may happens every day in any bank. If you use that logic or bases for lawsuit, all of the banks will be forced to close the doors. Nothing wrong with arbitrations if your client just wants the original amount of the money back and or smaller interest rate. After all, you agree to the terms before opening the account and knew what will happen later should a legal problem arises. All of the fine print is approved by FDIC, FEC, FTC, Dodd-Frank and other state specific statutes and regulation.
Imagine There's No Arbitration
Imagine There's No Arbitration   |     |   Comment #10
Imagine the world economy collapsing because of the banksters. Oh, you don't have do do that, it's already happened. Any regulation that is an attempt to prevent further fraud by banks is a good regulation.
Bozo   |     |   Comment #11
Martin, you know, and I know, the whole point of mandatory (binding) arbitration clauses, when coupled with "no class action" clauses, is to preclude litigation. From the banksters' point of view, that's a good thing. From the aggrieved consumers' point of view, well, maybe not.

Mind you, I have no personal agenda when it comes to financial institutions. Before I retired, I cashed many a check from same. I would simply note that contracts of adhesion are just that. They are drafted by folks who are laser-focused. And those folks are not here to help the consumer.
Martin   |     |   Comment #15
Bozo, you use the statement "..to help the consumer..", I always wanted to know what help the consumer needs?
Is it the money is confiscated or the money are held hostage or the bank is not paying you the interest or...?
I have never heard of a bank playing the customers for fools or ignoring their complaint.
Any bank wants to solve any discrepancies at once or if the customer is plating a victim just because it wants to collect more money than the original deposit, then the arbitration is appropriate.
No bank on earth wants bad publicity and if everyone is allowed to sue then the whole economy will come to a stop and the money will be frozen for everyone. You and I will be disadvantaged by allowing class action lawsuits to pop up at will or cleaver attorneys to bug down the whole banking business.
A customer is just that a customer, if you do not like the services or attitude of a certain bank, move to the next one, a customer can not demand a business to accommodate everyones needs. We do not complain at DMV for long lines or double the last year registration fees or the insurance company raised our premiums or the grocery store was out of the sales items.
The banks are essential part of the economy and they come first and the customer is the second. We may not like that arraignment, but that is the reality we have to live with.
Ambulance Chaser
Ambulance Chaser   |     |   Comment #4
Good luck with getting this with a Republican controlled government.
Dunmovin   |     |   Comment #5
Some are close to this more than others. Suffice to say...Absent a change in the law on arbitrations...and consistent with good planning in the absence thereof...what is a "good" course of action? Talk to a lawyer before signing any agreement that has important ramifications!

The 2013 unanimous California Supreme Court decision of Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit ****’n, 55 Cal.4th 1169 (2013) must be appreciated...go google it. It turned the concepts of fraud in contract formation upside down, i.e. merely b/c there is a seemingly "complete" agreement, it may not be that way. Other states?

Thus, document, document, etc and when in doubt document more. See a lawyer.
Bozo   |     |   Comment #6
To: Poster Dunmovin.
The devil's in the details, as it were. Folks here at DA chase the best rates. Quite often, the "fine print" provides binding arbitration. If you want the CD, you agree to its terms.

Binding arbitration is sneaky. You might (through the fine print) not only agree to the process, but also the procedure. As an extreme example, one opens a CD with a bank or credit union in West Virginia.. Several months into the term, the financial institution unilaterally lowers the rate on the CD. The "fine print" requires arbitration. In West Virginia.

As they say, good luck on that.
Dunmovin   |     |   Comment #8
Bozo, most would be inclined to know about their options and the viability of each for important agreements---especially when a financial institution representative represented "this or that" in connection with a large, long term CD purchase.
Att   |     |   Comment #7
I never encountered a problem with a bank that would require arbitration. When dealing with securities that's another story. Remember brokers are not fiduciaries, they represent the firm. With most major financial agreements they are in favor of the person who writes the contract. If you need a mortgage or credit card most institutions have the same contracts. Most people don't read agreements or contracts and when issues arise its to late.
Bozo   |     |   Comment #12
To Poster "Att":

Folks who have been "around the block" here at DA might remember Ft. Knox FCU. A few years back, Ft. Knox became the poster child for changing terms and conditions without warning. While the change to the EWP did ruffle a few feathers, nothing much happened as a result.

Now, let's up the ante, so to speak. You buy a 5-year CD at 2.75%. The "fine print" states the terms and conditions of the CD may be altered "at the discretion of the institution" upon 30 days notice. The institution yanks the interest rate.

The "fine print" in the CD disclosure also mandates binding arbitration in the event the depositor is miffed, and prohibits class actions.

Would it be too much to hazard a guess that the purchaser of the CD is in the proverbial "box canyon".
Att   |     |   Comment #13
If you agree to the terms which includes such a provision then it may be difficult to win a class action. Some institutions have such clauses and one I believe is Ally. These class action suits make money for the lawyers with limited awards for the people. I purchased a stock and a class action was taken against the board and CEO for misleading statements which when later found out caused the stock to drop. Of the 73 million dollar settlement the lawyers are getting 1/3 of that money plus expenses. So the reward will be very limited compared to the funds that were lost.

If a bank did not honor a rate the best action would be in the court of public opinion. The pressure against an institution from the press, public and the hopefully the FDIC or NCUA would hopefully reverse such a decision.
Bozo   |     |   Comment #14
To Poster "Att":

While not a fan of class actions, I suspect you give too much credence to the "court of public opinion". Said court didn't affect Ft. Knox FCU. As I recall, folks herein complained. Some even wrote to the NCUA. The "bottom line" was "pound salt".

I suspect many financial institutions took note. Ft. Knox pushed the envelope. These days, when I buy a CD, and the CD has the predictable "fine print", I just assume the terms and conditions will be in effect only so long as they are in effect.

Stated another way, I'm not expecting the NCUA or FDIC to come riding to the rescue.
Bogie   |     |   Comment #16
Naturally, that is not the purpose or the responsibility of the NCUA OR FIDIC.
Bogie   |     |   Comment #17
Typo caught to late. FDIC not FIDIC.
Martin   |     |   Comment #18
Bozo, You seams to know something about the law, would you please elaborate on:

Civil forfeiture where the government can take and sell your property without ever convicting or even charging you with a crime is one of the greatest threats to property rights in the nation today. Civil forfeiture cases proceed against one’s cash, cars, or home, which means that property owners receive few, if any, of the protections that criminal defendants enjoy. To make matters worse, when law-enforcement agencies take and sell your property, they frequently get to keep all the proceeds for their own use. This gives agencies a direct financial incentive to “police for profit” by seizing and forfeiting as much property as possible.

Civil forfeiture is a legal fiction that pretends to try inanimate objects for their involvement with criminal activity. Civil forfeiture actions are in rem proceedings, which means “against a thing.” That is why civil forfeiture proceedings have bizarre titles, such as United States v. $35,651.11 in U.S. Currency or State of Texas v. One 2004 Chevrolet Silverado.

And what is stopping the banks not to use it against the customers to confiscate the cash on deposit. It only needs to say the money was suspiciously deposited. No crime needs to be involved or proven.
Bogie   |     |   Comment #19
To me, civil forfeiture is absolutely nothing short of legalized robbery. The mere existence of such law goes against every principle of innocent until proven guilty. I have great sustain for the politicians, judges, etc, who ever created and legalized a such scheme. Racketeering at it's finest!

No, I have never been affected by such practice..........yet, but we all can fall victims at any time at the whims any police force with little to no recourse.
Bogie   |     |   Comment #20
Here is an article just today about the abuse and proposed changes concerning asset-seizures:


I would have proposed any assets seized couldn't be kept by the local police departments and would have to be turned over U.S.Treasury Department. That would further cut down on the abuse of such asset seizures.
Bozo   |     |   Comment #21
Martin, I'm woefully uninformed when it comes to civil forfeiture. At first blush, it would appear to violate the "due process" clause.
lou   |     |   Comment #22
The only problem with class action suits is the ambulance-chasing lawyers profit massively from them, not so much for the plaintiffs. They are usually paid pennies on the dollar from the negotiated lawyer-friendly settlements. You might know something about this, Bozo.
Dunmovin   |     |   Comment #23
Class actions provide a vehicle to go after the wrong-doer that is usually cost effective. If one goes on an individual basis, the cost is prohibitive. But one could pay on a hourly basis rather than a % of award, if any. Soooooo, without a change in the "system," does one read from this thread that paying an attorney in a class action representation is worst and thus one would rather have the wrong-doer continue in their ways? The enemy is usually not your attorney.

In a way reminds of an individual yesterday who told me about finding a number of old US Savings Bonds (hard copies) that are no longer accruing interest...he would rather not pay federal income tax and thus not cash them...even if he was in the 35% bracket, he would rather forgo the 65%...interesting. The Gov't likes that logic. Perhaps wrong-doers like the attorneys being the bad guy...almost as weird as Delta casting itself recently as being a victim. Strange times!
lou   |     |   Comment #24
With all due respect Dunmovin, most class actions suits do not go to trial, as the lawyers' strategy is to force the company to settle to avoid the massive legal costs. The plaintiffs usually receive only a fraction of what they lost, while the ravenous attorneys profit handsomely. The system is rife with abuse. There is a reason why the Democratic Party is a tool for the trial bar.
Dunmovin   |     |   Comment #25
Most of all litigation settles but unless/until a suit is filed, no relief.
UNEEDMORFIBRE   |     |   Comment #27
I SPENT DECADES SURROUNDED BY THE TOP LEGAL MINDS IN ALL THE USUAL CORPORATE SPECIALTIES IN A TOP 5 MAJOR CITY,,,,,I BEGAN MY CAREER EXPEDITING DUCES TEKES AT THE AGE OF 18 NOT EVEN A COLLEGE SOPHOMORE,,,,HOLDING HANDS WITH THE TOP LASALLE STREET PI'S AND SLIP AND FALL MEISTERS AS WELL,,,,,,AND WHAT I FOUND THROUGHOUT MY LIFE,,,,,,,ask 6 lawyers about anything,,,get six different opinions on a semantic differential,,,,,,many judges hate fine print technicality smart guys in favor of usual and customary applications and on any given day anything can happen in a courtroom,,,,,,,THAT IS WHY I IGNORE ON LINE ANNONYMOUS LEGAL ADVICE,,,,,lol, lmfao, rofl, rolf, narf narf...

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